March 19, 2012 / 10:53 AM / 6 years ago

BREAKINGVIEWS - Govt's retrospective tax change just isn't cricket

MUMBAI (Reuters Breakingviews) - An historic hundredth century by heroic cricketer, Sachin Tendulkar, overshadowed the finance minister, Pranab Mukherjee‘s, less memorable fifth budget. But buried in the budget’s text was an attempt to reverse the Supreme Court’s judgment in the Vodafone (VOD.L) tax case. That just isn’t cricket.

Finance Minister Pranab Mukherjee speaks with the media after presenting the 2011-2012 economic survey report, outside the parliament in New Delhi March 15, 2012. REUTERS/B Mathur

As appeared possible at the time of the Vodafone judgement, there was always a chance there could be a sting in the tail. Vodafone had argued that the government had no jurisdiction over a transaction between two foreign companies occurring on foreign soil. Yet while the legal case was straightforward, there is a strong moral counter-argument. The business that changed hands was entirely based in India.

The end of the legal battle gave the government an opportunity to reflect on whether to bring new legislation. The government could have licked its wounds and merely changed the law on future deals. Instead, reeling from the court’s decision, it wants to retrospectively change the rules.

Vodafone’s $2.2 billion victory looked to have boosted India’s battered reputation. Foreign investors were delighted that the court took what they saw as a fair legal decision rather than blindly siding with the government. But this latest development takes India two steps back.

It is true that though the government’s intentions look clear, it has not yet been established how the Vodafone case will be affected. Lawyers are debating the point, but this change in the law at least opens the possibility for the court’s decision to be overturned.

Either way, New Delhi is undermining itself. In the midst of worrying corruption, weak governance and a softening economy, the court has been a beckon of hope. In the face of a policy vacuum, a period of judicial activism that would clean up Indian politics looked to have emerged. Perhaps this is New Delhi’s way of letting the judges know who really calls the shots. But in weakening the court, Pranab Mukherjee has also damaged his own legitimacy. Fairness is an important principle. And investors would be forgiven for wondering if India is a fair place to do business.


-- The finance minister, Pranab Mukherjee, proposed retrospective changes to India’s tax rules during his budget on March 16, prompting speculation that Vodafone’s $2.2 billion tax case could be reopened.

-- The Supreme Court ruled on January 20 that the country’s tax department has no jurisdiction over Vodafone’s 2007 deal to buy Hutchison Whampoa’s Indian mobile business for $11 billion.

-- The world’s largest mobile operator by revenue successfully argued that the Indian tax office has no right to tax the transaction between two foreign entities. Government authorities had said the deal was liable for tax because most of the assets were based in India.

(Editing by Robert Cole and Sarah Bailey)

The author is a Reuters Breakingviews columnist. The opinions expressed are his own

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